Immix Biopharma, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and plan of operations together with and our accompanying consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. All amounts in this report are in U.S. dollars, unless otherwise noted. Overview We are a clinical-stage pharmaceutical company focused on the development of safe and effective therapies for patients with cancer and inflammatory diseases. In August 2016, we established a wholly-owned Australian subsidiary, Immix Biopharma Australia Pty Ltd., in order to conduct various pre-clinical and clinical activities for the development of our product candidates. Since inception, we have devoted substantially all of our resources to developing product and technology rights, conducting research and development, organizing and staffing our Company, business planning and raising capital. We operate as one business segment and have incurred recurring losses, the majority of which are attributable to research and development activities and negative cash flows from operations. We have funded our operations primarily through the sale of convertible debt. Currently, our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through all stages of development and clinical trials and, ultimately, seek regulatory approval. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Furthermore, we incur costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenses on other research and development activities. 80 AxioMx Master Services Agreement On December 22, 2014, we entered into the MSA with AxioMx which is in the business of developing and supplying custom affinity reagents. We entered into the MSA to serve as a master agreement governing multiple sets of projects as may be agreed upon us and AxioMx from time to time. Pursuant to the MSA, we granted AxioMx a non-exclusive, royalty-free, worldwide, non-transferable license to certain of our intellectual property to perform services pursuant to the MSA, and AxioMx granted us an exclusive product assignment option (“Option”) which granted us an exclusive, royalty-bearing right, with the right to sublicense, under the Deliverable (as defined in the MSA) to further research, develop, use, sell, offer for sale, import and export one or more assigned products pursuant to the MSA. We exercised the Option in 2017. Pursuant to the MSA, AxioMx is entitled to royalties on the sale of any Deliverable that is used for diagnostic, prognostic or therapeutic purposes, in humans or animals, or for microbiology testing, including food safety testing or environmental monitoring. Specifically, we shall pay AxioMx a royalty of 3.5% of Net Sales (as defined in the MSA) of assigned products for each Deliverable used in licensed products for therapeutic purposes. In addition, we shall pay AxioMx a royalty of 1.5% of Net Sales of assigned products for each Deliverable used in licensed products for diagnostic or prognostic purposes; provided, however, if three Deliverables are used in an assigned product for diagnostic or prognostic purposes, the royalty shall be 4.5%. Subject to certain exceptions, the MSA shall continue for a period of five years from the effective date, unless extended by us and AxioMx. The MSA may be terminated by either party upon a material breach of the MSA, which breach remains uncured for 30 days after written notice thereof. In addition, we may also terminate the MSA at any time upon 30 days prior written notice to AxioMx. As of December 31, 2021, the MSA has not been amended or extended however, the royalty obligations described in this paragraph survive the termination of the MSA. Recent Developments On January 5, 2022, we sold 630,000 shares of our common stock in connection with our initial public offering pursuant to the underwriter’s option to purchase additional shares to cover over-allotments for a purchase price of $5.00 per share. We received net proceeds of approximately $2.9 million, after deducting underwriting discounts and commissions and offering expenses borne by us. The COVID-19 Pandemic and its Impacts on Our Business In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. This pandemic could result in difficulty securing clinical trial site locations, CROs, and/or trial monitors and other critical vendors and consultants supporting our trial. These situations, or others associated with COVID-19, could cause delays in our clinical trial plans and could increase expected costs, all of which could have a material adverse effect on our business and financial condition. At the current time, we are unable to quantify the potential effects of this pandemic on our future consolidated financial statements. Results of Operations Year Ended December 31, 2021 compared to the Year Ended December 31, 2020 General and Administrative Expense General and administrative expense was $1,225,487 for the year ended December 31, 2021 compared to $205,703 in the year ended December 31, 2020. The expenses incurred in both periods were related to salaries, patent maintenance costs and general accounting and other general consulting expenses, which were higher for the year ended December 31, 2021 due to preparation for our initial public offering. Research and Development Expense Research and development expense was $126,527 for the year ended December 31, 2021 compared to $248,149 for the year ended December 31, 2020. The decreased research and development expenses during the year ended December 31, 2021 as compared to the year ended December 31, 2020 were related to our funding situation, ongoing Phase 1b/2a clinical trial, including, but not limited to, CRO and related costs for maintaining and treating patients in the clinical trial. We expect to incur increased research and development costs in the future as our product development activities expand. Interest Expense Interest expense was $179,853 for the year ended December 31, 2021 compared to $101,976 for the year ended December 31, 2020, related to interest accrued on our convertible notes payable bearing interest at rates from the applicable federal rate to 6% per annum. Change in fair value of derivative liability The change in fair value of derivative liability was $22,759,829 for the year ended December 31, 2021 compared to $575,000 for the year ended December 31, 2020, primarily related to an increased probability of a “Qualified Financing” as defined in our convertible notes which occurred on December 20, 2021. Loss on Debt Extinguishment In December 2021, in connection with our IPO, our convertible notes along with the corresponding accrued interest, were automatically converted into an aggregate of 5,633,689 shares of our common stock. As a result of the conversion, we recorded a loss on debt extinguishment of $86,170. Provision for Income Taxes Provision for income taxes for the year ended December 31, 2021 was $6,013 compared to $17,547 for the year ended December 31, 2020, due to withholding taxes relating to our Australian subsidiary. 81 Net Loss Net loss for the year ended December 31, 2021 was $24,383,879 compared to $1,147,863 for the year ended December 31, 2020, primarily due to the change in fair value of derivative liability and increase in expenses in preparation for our initial public offering. Funding Requirements Our primary use of cash is to fund operating expenses, which consist of research and development expenditures and various general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: ● the scope, timing, progress and results of discovery, pre-clinical development, laboratory testing and clinical trials for our product candidates; ● the costs of manufacturing our product candidates for clinical trials and in preparation for regulatory approval and commercialization; ● the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates; ● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; ● the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies; ● expenses needed to attract and retain skilled personnel; ● the costs associated with being a public company; ● the costs required to scale up our clinical, regulatory and manufacturing capabilities; ● the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive regulatory approval; and ● revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive regulatory approval. We will need additional funds to meet our operational needs and capital requirements for clinical trials, other research and development expenditures, and general and administrative expenses. We currently have no credit facility or committed sources of capital. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. 82 Cash used in operating activities Net cash used in operating activities was $1,589,307 for the year ended December 31, 2021 and $404,694 for the year ended December 31, 2020 and primarily included CRO, clinical site costs and related logistics. Cash used in investing activities Net cash used by investing activities was $802 for the year ended December 31, 2021 and $0 for the year ended December 31, 2020. We purchased equipment during the year ended December 31, 2021. Cash provided by financing activities Net cash provided by financing activities was $18,848,934 for the year ended December 31, 2021 and $0 for the year ended December 31, 2020. We received $18,648,934 in net proceeds from the issuance of our shares of common stock pursuant to our initial public offering during the year ended December 31, 2021, along with $200,000 in proceeds from convertible notes payable. The continuation of the Company as a going concern is dependent upon its ability to obtain continued financial support from its stockholders, necessary equity financing to continue operations and the attainment of profitable operations. As of December 31, 2021, we have incurred an accumulated deficit of $29,755,534 and have not yet generated any revenue from operations. Additionally, management anticipates that its cash on hand will be sufficient to fund its planned operations for at least 12 months from the filing date of this Annual Report on Form 10-K. We will have additional capital requirements going forward and may need to seek additional financing, which may or may not be available to us. Critical Accounting Policies This management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to prepaid/accrued research and development expenses, stock-based compensation, value of deferred tax assets and related valuation allowances, and fair value of the embedded derivative financial instrument related to our convertible promissory notes. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Derivative Instruments - We evaluated our convertible notes to determine if those contracts or embedded components of those contracts qualified as derivatives to be separately accounted for in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging . The result of this accounting treatment is that the fair value of the embedded derivative is marked to market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations and comprehensive loss as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. 83 In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. We determined that the convertible notes contain embedded features that provide the noteholders with multiple settlement alternatives. Certain of these settlement features provide the noteholders the right to receive cash or a variable number of shares upon the completion of a capital raising transaction, change of control or default by us, which are referred to as “redemption features.” Stock-Based Compensation - We measure all stock-based awards granted based on their estimated fair value on the date of the grant and recognize the corresponding compensation expense for those awarded to employees and directors over the requisite service period, which is generally the vesting period of the respective award, and for those awarded to nonemployees over the period during which services are rendered by nonemployees until completed. We have typically issued stock options with service-based vesting conditions and we record the expense for these awards using the straight-line method. We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. The following table reflects the weighted average assumptions used to estimate the fair value of stock options granted during the year ended December 31, 2021: Volatility 117-128 % Expected life (years) 10.0 Risk-free interest rate 1.37-1.74 % Dividend rate — % In 2020, no stock options were granted. Before establishing a public market for the trading of our common stock and due to a lack of company-specific historical and implied volatility data, we based the estimate of expected stock price volatility on the historical volatility of a representative group of publicly traded companies for which historical information was available. The historical volatility was generally calculated based on a period of time commensurate with the expected term assumption. We used the contractual term for the expected term for options granted to employees and directors. We did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term and used the contractual term since the stock options were not issued at-the-money. For options granted to non-employees, we utilized the contractual term. The risk-free interest rate was based on a U.S. treasury instrument whose term was consistent with the expected term of the stock options. The expected dividend yield was assumed to be zero, as we had never paid dividends and did not have plans to pay any dividends on our common stock. Fair Value of Common Stock Prior to establishing a public market for our common stock, the estimated fair value of our common stock had been determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. 84 Third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . Our common stock valuations were prepared using a hybrid method that incorporates elements of both a probability-weighted expected return method (“PWERM”) and an option pricing method (“OPM”). The OPM is based on the Black-Scholes option pricing model, which allows for the identification of a range of possible future outcomes. The OPM treats common stock and convertible instruments as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. A discount for lack of marketability of the common stock is applied to arrive at an indication of value for the common stock. PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a relatively high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM include an initial public offering, as well as non-initial public offering market-based outcomes. Determining the fair value of the enterprise using the PWERM requires the Company to develop assumptions and estimates for both the probability of an initial public offering liquidity event and stay private outcomes, as well as the values the Company expects those outcomes could yield. Prior to establishing a public trading market of our capital stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine its estimate of the fair value of our common stock, including changes in the following factors between the date of the March 31, 2021 valuation and the grant date: ● our business, financial condition and results of operations, including related industry trends affecting our operations; ● the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given prevailing market conditions; ● the lack of marketability of our common stock; ● the market performance of comparable publicly traded companies; and ● U.S. and global economic and capital market conditions and outlook. The assumptions underlying our board of directors’ valuations represented our board’s best estimates, which involved inherent uncertainties and the application of our board’s judgment. As a result, if factors or expected outcomes had changed or our board of directors had used significantly different assumptions or estimates, our equity-based compensation expense could have been materially different. Recent Accounting Pronouncements See Note 2 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our consolidated financial statements. 85 JOBS Act On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including, without limitation, (i) providing an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with the requirement adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding the communication of critical audit matters in the auditor’s report on financial statements. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this item. 86